Is This the Bottom for Bombardier Stock?
Bombardier Inc. (TSX:BBD.B), Canada’s largest industrial group, costs a mere $1.10 per share. However, the price of Bombardier stock defies logic, considering that the company is just one of four commercial airliners flying in North America. The Montreal-based company also makes business jets, trains, and streetcars. In this sense and at its current share price, Bombardier stock has competition.
Currently, Bombardier has a $9.0-billion deficit and has recently received a $1.0-billion boost (bailout) from the Government of Québec, with the Canadian federal government mulling additional financial support. (Source: “Bombardier looking for federal help after Quebec’s $1B bailout,” CBC News, November 1, 2015.) Yet the promised and potential government subsidies defy the fact that Bombardier has an impressive portfolio of divisions, each of which could function as a significant player in its respective transportation/industrial niche.
Bombardier executives recently visited New York to “sell” the merits of Bombardier stock to institutional investors, seducing them with a new business plan for the next five years and a flight path out of the manufacturing impasse suffered by its crucial “CSeries” program.
Bombardier’s CEO, Alain Bellemare, said 2016 would be a year of transition for the company. After repairing the health of the stock’s liquidity, collecting $2.5 billion from the Government of Québec and related institutions, management said the company would be able to increase revenues, profits, and cash flow. Despite short-term challenges, Bombardier’s potential is big and the company will improve, as Bellemare hinted during a webcast of the New York meeting. (Source: “Bombardier chief confident in turning business around,” BNN, November 24, 2015.)
Cost Cuts Are Key for Bombardier Stock
However, Bellemare also warned that profits would be down for fiscal 2016, blaming it on the decrease in production in the aerospace sector, which is due to a lag in business jet sales, and on the costs of developing the CSeries program. That said, Bombardier shareholders were promised increasing sales that are to reach more than $25.0 billion in 2020. (Source: “Bombardier says this time is different after CSeries rescue,” Montreal Gazette, November 25, 2015.) Last year, the company managed to accumulate $20.1 billion in revenue.
Profits are also expected to double in the coming years. According to management’s expectations, margins will reach eight percent by 2020, which is rather high in the aerospace business.
In order to improve its financial results, Bombardier will have to reduce costs. Unlike some corporations, however, the company’s production cost cuts cannot simply be achieved by shifting some less intensive activities to Mexico, Morocco, or India, where facilities already exist and labor costs are cheaper, as Bombardier plans to do. The company will also have to enhance complex tasks and research in Montreal and Belfast.
If any owner or prospective owner of Bombardier stock were concerned about Bombardier liquidity, the cash injection from the government of Québec has reassured them. According to Bombardier, the transfer of less complex work requiring a lot of labor in low-cost countries should achieve cumulative savings of more than $60.0 million by 2020.
Bombardier Applying Lessons from Other Divisions
Additionally, Bombardier intends to reduce its supply costs by $200 million per year by 2020. It won’t do so by skimping on requirements, but rather by adopting more efficient ways to source its materials and the like.
Bombardier Transportation has some lessons for the company as a whole in this area. Between 2012 and 2014, the railway division cut its number of suppliers from 37,000 to 9,500. The hunt for redundancy continues, as by 2020, Bombardier Transportation expects to centralize procurement and further cut its number of suppliers. (Source: “Bombardier expects tough 2016 before transformation hits stride by 2020,” The Record.com, November 24, 2015.)
Bombardier’s ground transportation division designs and manufactures rail vehicles, rail control systems, and bogies. It could fetch some $5.0 billion if floated via an initial public offering (IPO) or if it were sold to one of the company’s global competitors, such as Alstom, Siemens, or China’s CSR Corp. Such a move could see Bombardier concentrating on the aerospace sector, where the company could then focus all of its energy.
Bombardier, which has held a dominant slot in the regional turboprop and jet airliner market, is entering a higher niche with the CSeries, which has so far attracted 243 firm orders against a target of 300. However, the advanced and capable twinjet, a “Boeing 737” and “Airbus A319” series competitor, has failed to gather new orders due to industrial and organizational issues at Bombardier itself.
The CSeries is attractive. So much so, that if Boeing or Airbus were to invest in its production, they would gain a fully developed aircraft with target-beating performance at a bargain price. The CSeries should obtain certification from Transport Canada by the end of 2015, reviving customer interest
Bombardier’s revival should bare its best fruits in 2020, as the CSeries becomes operational with existing customers and the new “Global 7000” and “Global 8000” business jets also come on line.